Regulation strengthens banks’ ability to cope with a housing downturn

by Kelly Gregor08 Mar 2018

The major Australian banks’ ability to withstand a severe downturn in the housing market and household sector – should it occur – has been strengthened by regulatory intervention to tighten underwriting standards and bolster capital buffers, Fitch Ratings reports.

The major banks – ANZ, CBA, NAB and Westpac – face rising macroeconomic risks to asset quality, largely stemming from households.

Household debt is high by historical and international standards, at 188% of disposable income at end-September 2017, and could increase further, given low interest rates and high house prices.

Indebtedness and sluggish wage growth make households vulnerable to changes in economic conditions, particularly a significant increase in unemployment or interest rates.

A large house price drop could also undermine banks’ asset quality, given that residential mortgages account for about 70% of household debt, the rating agency reported.                                               

Fitch said the base case is unemployment will edge down over the next two years and that the cash rate will only rise moderately. Meanwhile, house prices are likely to increase slightly in 2018, albeit at a slower pace than in previous years due to curbs on investor and interest-only loans introduced in 2017.                                                                                                                                                

The major banks dominant position in their home markets gives them strong pricing power, which makes them more profitable than most of their international peers, Fitch added.

That said, an increased focus on conduct and competition by the authorities may limit their growth potential and could eventually challenge their pricing power. Digital disruptors also pose some longer-term risks, but banks are responding with technology investments.

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